Oct 19, 2009

Greed Is Not Good, and It’s Not Capitalism

Capitalism doesn’t need greed. What capitalism does need is human creativity and initiative.

... The rhetorical problem with this approach isn’t hard to spot. Most Americans are at least nominally religious, with moral sensibilities shaped by the Judeo-Christian tradition. The Bible and the Christian tradition both roundly condemn greed, and “progressive” religious leaders such as Tony Campolo and Jim Wallis have used this to drive a wedge between otherwise conservative Americans and the free market. Campolo, for instance, has condemned capitalism as based on the “greed principle.” But are these critics right? Must we choose between capitalism and Christianity, or, more generally, between markets and morality? I think not.

You might think that greed has been bound up with defenses of modern capitalism from the very beginning. You might recall Adam Smith, the father of modern capitalism, who famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Ayn Rand and others seemed to extend Smith’s point by treating greed as the basis of a free economy. There are connections here of course; but Smith never argued that greed is good. His view was far different, and far more subtle.

First, Smith argued that in a rightly-ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness. The butcher is more likely to give you meat if it’s a win-win trade—if there’s something in it for him—than if you’re just asking for a handout. This is, or should be, common sense.

Second, Smith knew the difference between self-interest and mere selfishness. Every time you wash your hands or take your vitamins or clock into work on time or look both ways before you cross the street, you’re pursuing your self-interest—but none of these acts is selfish. Indeed, generally speaking, you ought to do these things. Greed, in contrast, is a sort of disordered self-interest. Adam Smith, the moral philosopher, always condemned it as a vice.

Third, Smith never argued that the more selfish we are, the better a market works. His point, rather, is that in a free market, each of us can pursue ends within our narrow sphere of competence and concern—our “self-interest”—and yet an order will emerge that vastly exceeds anyone’s deliberations.

Finally, and most importantly, Smith argued that capitalism channels greed. He recognized that human beings are not as virtuous as we ought to be. While many of us may live modestly virtuous lives under the right conditions, it is the rare individual who ever achieves heroic virtue. Given that reality, we should want a social order that channels proper self-interest as well as selfishness into socially desirable outcomes. Any system this side of heaven that can’t channel human selfishness is doomed to failure. That’s the genius of the market economy.

And that’s the problem with socialism and all sorts of nanny-state regulatory prescriptions: They don’t fit the human condition. They concentrate enormous power in the hands of a few political leaders and expect them to remain uncorrupted by the power. Then through aggressive wealth redistribution and hyper-regulation, they discourage the productive pursuit of self-interest, through hard work and enterprise. Instead, they encourage people to pursue their self-interest in unproductive ways such as hoarding, lobbying, or getting the government to steal for them.

In contrast, capitalism is fit for real, fallen human beings. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand ... and thus without intending it, without knowing it, advance the interest of the society.” Notice he says “in spite of.” His point isn’t that the butcher should be selfish, or even that the butcher’s selfishness particularly helps. Rather, he argues that even if the butcher is selfish, he can’t make you buy his meat. He has to offer you meat at a price you’ll willingly buy. He has to look for ways to set up a win-win exchange. Surely that’s good.

So a free market can channel the greed of a butcher. But that’s not the only thing it can channel. It can just as easily channel a butcher’s noble desire for excellence of craft, or his desire to serve his customers well because he likes his neighbors, or his desire to build a successful business that will allow his brilliant daughter to attend better schools and fully develop her gifts. Capitalism doesn’t need greed. What capitalism does need is human creativity and initiative. ...

One of my favorite economics blogs is economist Gavin Kennedy's Adam Smith's Lost Legacy. Kennedy is an expert on Adam Smith. He scans the media for mentions of Smith and then critiques how people characterize his thought. Most folks he reviews don't seem to do so well. Kennedy caught this article by Richards and critiques whether Richards gets it right. How did Jay do?: Jay Richards on Selfishness.

Jay compresses two paragraphs together from Wealth Of Nations to make this unnecessary point about the so-called “invisible hand”. However, the example he makes of the “butcher, brewer, and baker” paragraph (Wealth Of Nations, Book I.ii.2:27) is spot on and worthy of wider circulation.

Regular eaders of Lost Legacy will know that Smith was not referring to all “business people” being “led by an invisible hand”, but only to those in a special case when they preferred the home trade to foreign trade, the trigger for their behaviour being their risk-avoidance regarding foreign trade (Wealth Of Nations, Book IV.ii. paragraphs 1 to 9: 452-56).

However, this corection is for the record only and in no way diminishes the excellent case that Jay Richards makes against the elision of self-interest into selfishness. Bernard Mandeville (1734: Fable of the Bees ) and his modern epigone, Ayn Rand, were absolutely wrong about selfishness. Adam Smith (and Jay Richards) was absolutely right about the anti-commercial sentiments of "selfishness".